Negotiate a Fair Price
QUESTION: I'm thinking of buying a practice that grosses $500,000 and nets 32% of gross revenue. The seller is asking $400,000 (80% of gross revenue). I think that's too much. What should I do?
Answer: In my experience, potential practice buy-outs and partnerships frequently fall through because buyers or sellers have unrealistic expectations about the value or earning potential of a practice. According to a 2004 survey,1 the fair market value of optometry practices ranged between 40% and 70% of their gross revenue, but 50% of practice owners believed their practices were worth 70% to 100% of their gross revenue. If you agree to pay the seller more than 70% of his annual gross revenue, you may have to take an unreasonably low salary to pay off the acquisition debt.
In contrast, many buyers want to pay less than fair market value because they have a heavy debt load and need higher than market compensation. Just as the seller shouldn't expect the buyer to pay a higher price so he can complete his retirement portfolio, the buyer shouldn't expect to pay a lower price so he can earn a higher than market salary. If you want to close the deal, you have to negotiate.
When you negotiate a practice buy-out, hire an independent appraiser who has no financial or personal incentive to over- or undervalue the practice. He can provide an unbiased opinion about community demographics, business risk and financial prospects. A good appraisal also will show that a practice's cash flow supports the purchase price, acquisition debt payment and a reasonable salary for the buyer. Factors such as practice size, net income, cash flow, age and condition of equipment and the transferability of goodwill from the seller determine the value of a practice, not the seller's financial needs.
The best advice I can offer a potential buyer is to base decisions on facts, not emotion. If the appraisal is lower than the seller's asking price, you and the seller will have to negotiate. You may not always reach an agreement, but it's better to turn down an unreasonable acquisition opportunity than to make a bad business and financial decision that will affect you for many years to come.